The consensus is that the current multifamily supply is manageable at the national level due to primarily two reasons. First, pent-up demand (due to a lack of available product at the same time we have strong demographic drivers) is evident in the marketplace. Second, following very light completions totals from 2010 through 2012, the current supply pipeline is still catching up, even though total starts exceed the long-term average. While the overall state of the market is evident, let’s explore which metros could be vulnerable to a near-term supply overhang.
For this article, we viewed supply and demand using a common size approach in select markets. By this measure, we looked at the number of units under construction today as a percentage of existing units for a given market. Next, we compared this inventory expansion percentage to another ratio: the three-year average annual absorption as a percentage of existing units. The difference between the two ratios gives us a sense for: 1) which metros are at risk of overbuilding in the short term, 2) which high-growth metros are poised for continued outperformance, and 3) insight into late-cycle recovery markets.
The chart above suggests that Charlotte, Austin, Nashville and Raleigh/Durham are most at risk of overbuilding in the short term. Longer term, however, these high-supply, high-demand metros are expected to regain equilibrium fairly quickly. Meanwhile, Oakland stands out as a consistent high-rent growth market with little supply concern, suggesting it’s poised for continued outperformance.
Despite facing structural challenges in the long term, Los Angeles and Atlanta will likely continue to build positive momentum in their late-cycle recovery markets in the short term.
Finally, average occupancy among the core 100 metros nationally is expected to experience a slight decline in late 2014 and into 2015 as new completions come online. Despite the expected backtracking of the national occupancy rate, apartment fundamentals overall will likely remain quite healthy due to strong demand drivers.
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